Welcome "Tax & Money Stuff" a column in partnership with Hannah Cole. Hannah is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. Read her post about saving for retirement here.

In my last post, I addressed a common dilemma for the new freelancer - an unexpectedly large tax bill in April. I explained self-employment tax, and why it catches so many people off guard. In this post, I’ll explain estimated quarterly taxes, which are the solution to that huge April tax bill.

You’ve newly struck out on your own, and you had your first profitable year as a freelancer. Congratulations! But when you prepared your taxes, you were blindsided by the enormous tax bill. You got a crash course in self-employment tax, and now you’re ready to set yourself up better for next year. It’s time for estimated quarterly taxes.

Estimated Quarterly Taxes – What They Are

Our tax system is called “pay as you go.” If you’re employed, your employer withholds taxes from your paycheck each pay period, so that at the end of the tax year, you should have already paid in approximately the amount of taxes that you owe. When you overpay, you get a refund, and when you underpay, you owe some more tax on top. But the idea is that you don’t pay all of your taxes for the year at one time - for almost everyone, setting aside that much money would be difficult.

When you freelance, there’s no employer to withhold tax for you, so it becomes your job. (Yes, another burden of the gig economy). Everyone knows, and that includes the IRS, that it’s much harder to pay one big bill than several small ones. So to approximate the withholding situation of an employer, the IRS requires freelancers who owe at least $1000 in tax to make estimated quarterly payments.

It may seem yucky to have to pay taxes four times a year instead of just once, but it’s a good thing. Breaking it up into quarters makes the payments much easier to handle. And you avoid an unpleasant surprise in April.

What are the deadlines?

April 15, June 15, September 15 and January 15

How much do I need to pay?

Generally, you need to pay in 100% of the tax you owed in the previous year, broken into four installments. If you meet this threshold (called a “safe harbor”), you generally avoid penalties and interest. If you make over $150,000 in adjusted gross income (or $75k if you are married filing separately), then you must pay 110% of last year’s tax.

You can find this amount by looking at last year’s tax return. Be sure to look at the line that states your total tax for the year, and not just the amount you owed when filing. Take this total tax number, divide it by four, and that’s each estimated quarterly payment amount.

What about the huge variations in my income year to year?

Good point. You’re a freelancer. You have great years and not-so-great years. If you expect to make substantially less money this year than last, and don’t want to pay more taxes in than you need to, you are allowed to pay 90% of your total tax due for the current year in four installments.

But how do I know what my tax due will be this year, since this year hasn’t finished happening yet?

A fine point again. That’s why most people choose to pay 100% of last year’s bill. It’s much easier to calculate. But you are the best person to make an estimate of how good your income will be, and if it is truly going to be much lower this year, you are allowed to base your estimates on this year’s income instead of last year. 90% of this year’s total tax due is a “safe harbor” amount - meaning, so long as you have paid at least that much, you will not be assessed any penalties or interest.

So paying estimated quarterly taxes of 100% (or 110%) of last year’s tax or 90% of this year’s tax keeps you safe from penalties and interest. Excellent.

But you can still be hit by an unexpectedly high tax bill in April if your income is higher this year than last. This is where the word “estimate” is extra relevant. Estimated Quarterly Taxes are just that - estimates. The IRS does not expect you to predict the future perfectly. (But if you can, expect a call from me for some stock tips). There’s no one in a better position to judge whether this is a good money year or a bad one than you. So if you just hooked a big client or got an advance on your novel, it’s a good idea to increase the amount of estimated taxes you pay in. You can increase your payment or make an extra payment at any time. And it’s better to do it as the income comes in than later. We’re all human, and money tends to get spent, so make an extra payment right when you get the big check. Don’t wait until it’s disappeared into bubble gum and comic books.

One last point. Remember state taxes. States vary. Many don’t require estimated quarterly taxes (some do!), but don’t forget that you will still owe them money (unless you live in one of the handful that don’t have income tax). A good practice is to look at last year’s state tax owed, and set that amount aside. You can do it in chunks, as income comes in, or divide that number by 12, and put aside that amount each month into a separate bank account. That way, when you do get your April tax bill, the money for state taxes is there for you.

Estimated taxes take a little getting used to, but once you’re in the rhythm, they’re not so bad. The key is to become familiar with calculating (and recalculating) them, setting aside enough of your income in a separate account, set the deadlines on your calendar, and make paying them a habit. In my next post, I’ll discuss the methods of paying estimated quarterly taxes; what your options are, how to estimate what to set aside, and some tips to help your cash flow.

Hannah is a tax expert who specializes in working with creative businesses and their owners. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. follow Hannah on Twitter at @sunlight_tax, or sign up for her newsletter to get friendly, timely updates about money stuff for creative people.

Disclaimer: This is meant as a guide, not professional advice. If you have questions about your own situation, talk to a tax professional.

January 31st is the last day to get The Ultimate, Honest Guide to Understanding Artist Taxes on sale for 20% off! Use the link in profile to get the discount! The Ultimate, Honest Guide to Understanding Artist Taxes will teach you: How to overcome the fear that prevents many artists from getting all of the tax benefits they could be entitled to; What your tax responsibilities are as an artist; The concept of the Schedule C: what it’s for and why you should use it; Whether filing your taxes as a business is appropriate for your arts practice; The difference between hobby vs. business rules and why they are a pitfall for artists plus much more! #artisttaxes #taxesforartists #sulighttax #hannahcole #delveart #artistempowerment #creativebusiness #creativeentrepreneur

This Friday in Brooklyn! Back by popular demand! Hannah will be back in town to give her super-informative tax workshop. Come learn: What can I deduct? Do I bring receipts to my accountant? Is my art a business or a hobby? What is a Schedule C? How do I deduct my home studio? Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. Link in profile to sign up! #taxesforartists #taxworkshop #sunlighttax #creativeentrepreneurs #creativebusiness #artsgowanus #hannahcole

Just because it's good to re-read this letter every once in a while...
Sol LeWitt writing to Eva Hesse in 1965:
"Dear Eva,
It will be almost a month since you wrote to me and you have possibly forgotten your state of mind (I doubt it though). You seem the same as always, and being you, hate every minute of it. Don’t! Learn to say “Fuck You” to the world once in a while. You have every right to. Just stop thinking, worrying, looking over your shoulder, wondering, doubting, fearing, hurting, hoping for some easy way out, struggling, grasping, confusing, itching, scratching, mumbling, bumbling, grumbling, humbling, stumbling, numbling, rambling, gambling, tumbling, scumbling, scrambling, hitching, hatching, bitching, moaning, groaning, honing, boning, horse-shitting, hair-splitting, nit-picking, piss-trickling, nose sticking, ass-gouging, eyeball-poking, finger-pointing, alleyway-sneaking, long waiting, small stepping, evil-eyeing, back-scratching, searching, perching, besmirching, grinding, grinding, grinding away at yourself. Stop it and just
DO"
#justdo #lettertoevahesse #sollewitt #evahesse #inspirationforartists

You might be wondering how the new tax legislation affects you as an artist/freelancer. @hannah.cole.painter of Sunlight Tax breaks it down for you in a FREE 15 minute video. Empower, educate and protect yourself! Link in profile to full video. #artistshelpingartists

If you have asked yourself any of these questions, you should join us in Brooklyn next Friday to get the answers! Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. Link in profile for more info and to sign up! #taxesforartists #taxworkshop #creativeentrepreneur #creativebusiness #artbusiness #professionalpractice #sunlighttax #hannahcole @hannah.cole.painter

Beautiful show at Morgan Lehman’s new 2nd Gallery. #ericaprince and #osamukobayashi Also, don’t forget to sign up for the Taxes for Artists workshop with Hannah Cole happening in Brooklyn on January 26th! Link in profile. #artisttaxes #artistempowerment #creativeentrpreneur #creativebusiness #taxworkshop #taxseason #sunlighttax

Back by popular demand! Hannah will be back in town to give her super-informative tax workshop. Come learn! What can I deduct? Do I bring receipts to my accountant? Is my art a business or a hobby? What is a Schedule C? How do I deduct my home studio? Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. To register, click link in profile. #taxesforartists #sunlighttax #taxseason #taxworkshop #creativebusiness #creativeentrpreneur #artistempowerment

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